Utility and Consumer Behavior

This set of flashcards covers key concepts related to utility, marginal utility, consumer behavior, and decision-making as outlined in the lecture notes.

What is utility?

Utility is the satisfaction or happiness received from consuming a good or service.

What is marginal utility?

Marginal utility is the additional satisfaction from consuming one more unit of a good or service.

What does the formula for total utility (TU) represent?

Total Utility (TU) = ∑Marginal Utilities (∑MU), representing the total satisfaction derived from consuming a certain amount of goods or services.

What is diminishing marginal utility?

Diminishing marginal utility is the concept that as more units of a good are consumed, the additional satisfaction from each unit typically decreases.

What is negative marginal utility?

Negative marginal utility occurs when consuming more of a good reduces total satisfaction.

Define utility maximization.

Utility maximization is the process of obtaining the greatest level of satisfaction from consuming goods and services within a given budget.

List the four assumptions of utility maximization.

1. Rational Behavior 2. Ability to Rank Preferences 3. Limited Income 4. Consideration of Prices.

What is the Equal Marginal Principle?

The Equal Marginal Principle states that individuals maximize their total utility when the marginal utility per dollar spent on each good or service is equal across all purchases.

How is a budget line derived?

A budget line is derived using the formula: Budget = (Price of Good A * Quantity of Good A) + (Price of Good B * Quantity of Good B).

What do indifference curves represent?

Indifference curves represent combinations of two goods that provide the same level of total utility or satisfaction to a consumer.

What does it mean when an indifference curve is convex to the origin?

An indifference curve is convex to the origin because as a consumer consumes more of one good, they are willing to give up less of the other good due to diminishing marginal utility.

When does utility maximization occur in relation to indifference curves and budget lines?

Utility maximization occurs where the highest possible indifference curve is tangent to the budget line.

What is the marginal rate of substitution (MRS)?

The marginal rate of substitution (MRS) is the rate at which a consumer is willing to substitute one good for another while maintaining the same level of utility.

What are the key characteristics of indifference curves?

1. Downward sloping 2. Convex to the origin 3. Higher curves represent higher utility 4. Curves do not cross.

What is the goal of consumption?

The goal of consumption is to maximize total utility from goods and services while considering the costs involved in purchasing.

How do consumers behave in relation to their budget constraints?

Consumers behave rationally and aim to maximize their preferences within their budget constraints.

What is the law of diminishing marginal utility?

The law of diminishing marginal utility states that as consumption increases, the utility gained from each additional unit generally decreases.